Indonesia Market Strategy, Flirting with inflation is not good for consumer names, Credit Suisse

● We concur with our economics team view that the recent 25 bp
cut in policy rate may lead to higher price expectations and thus
inflation may have troughed.
● With the exception of the post-2008 global financial crisis, when
the world was coming out of deflation fears, we find the uptrend in
inflation has been unfavourable for Indonesian consumer names.

● We trim Indonesian consumer names, as: (1) inflation has
troughed; (2) Indonesian consumer names have outperformed the
market in the past 12 months; and (3) Indonesian consumer
names are trading at a 151% premium to MSCI GEM and a 56%
premium to MSCI Indonesia based on P/B less ROE. We prefer to
switch to CPO and commodity names.
● We recommend taking profit from consumer names with
demanding valuations, such as ASII, UNVR, KLBF and GGRM, to
switch to better value names in the sectors such as CPO (LSIP,
SIMP) and coal (HRUM, ITMG, PTBA).

A rate cut, not always a good thing
We concur with the view of our economics team, that the recent 25 bp
cut in policy rate supports our view that the central bank intends to
support growth. However, such a strategy may lead to price
expectations, supporting our view that inflation has bottomed (see
Breaking news: Bank Indonesia Meeting—Another risky rate
reduction).
Generally, a rate reduction would be positive for the consumer sector.
However, in this case, we take this opportunity to sell into strength if
the recent rate cut translates into some rebound in Indonesian
consumer names. We believe that the aggressive move by the central
bank may lead to an uptrend in inflation ahead.
Uptrend in inflation, unfavourable for consumer names
With the exception of post-2008 global financial crisis, when the world
was emerging from deflation fears, we find that the uptrend in inflation
has been unfavourable for the Indonesian consumer names. As we
believe that inflation has troughed, we see the risk of an uptrend in
inflation. We thus foresee softer sentiment on Indonesian consumer
names.
Trim consumers, switch to agricultural and coal names
We see three reasons to be cautious on Indonesian consumer names:
(1) the potential uptrend in inflation from hereon may curb sentiment on
 consumer stocks; (2) Indonesian consumer names have staged
significant outperformance in the past 12 months which may spark profit
taking on these names; and (3) Indonesian consumer names are trading
at a 151% premium to MSCI GEM and a 56% premium to MSCI
Indonesia based on P/B less ROE.
We recommend taking profit from consumer names with demanding
valuations, such as ASII, UNVR, KLBF and GGRM, and to switch to
better value names in sectors like CPO (LSIP, SIMP) and coal (HRUM,
ITMG, PTBA).

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